2008: History repeats …disturbance of orderly life and convenience‏

Rather than offering any blinding insights I thought is best to put forward a historical perspective on what we are experiencing.

Apart from the obvious time gap between the 1929 crash and what is happening right here and now, I think there are some obvious flaws not only in our financial systems but also within the state our collective economic and financial intelligence when it comes to learning from previous folly.

John Kenneth Galbraith’s analysis of the 1929 Crash and subsequent depression share some common features with what we are experiencing now and all because we failed to learn the lessons of past folly.

Galbraith writes:

...as throughout history, financial capacity and political perspicacity are inversely correlated. Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.”

“Even in such a time of madness as the late twenties, a great many man in Wall Street remained quite sane. But they also remained very quiet. The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them.”

“Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small. Alternatively, the shock to confidence and the lost of spending by those who were caught in the market might soon have worn off. But business in 1929 was not sound; on the contrary it was exceedingly fragile. It was vulnerable to the kind of blow it received from Wall Street. Those who have emphasized this vulnerability are obviously on strong ground. Yet when a greenhouse succumbs to a hailstorm something more than a purely passive role is a common feature of all these earlier troubles was that, having happened, they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recoreded 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruiness fall. Even the man who waited out all of October and all of November, who saw the volumne of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.”normally attributed to the storm.

“There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound. This is a circumstance of first-rate importance. Many things were wrong, but five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are:
(1) The bad distribution of income. [explaining
(2) The bad corporate structure.
(3) The bad banking structure
(4) The dubious state of the foreign balance.
(5) The poor state of economic intelligence.
“It is in light of the above weaknesses of the economy that the role of the stock market crash in the great tragedy of the thirties must be seen. The years of self-depreciation by Wall Street to the contrary, the role is one of respectable importance. The collapse in securities values affected in the first instance the wealthy and well-to-do. But in the world in the world of 1929 this was a vital group. The members disposed of a large proportion of consumer income; they were the source of a lion’s share of personal saving and investment. Anything that struck at the spending or investment by this group would of necessary have broad effects on expenditure and income in the economy at large. Precisely such a blow was struck by the stock market crash.”

Any thoughts?


17 Responses

  1. What irks me is that Bush, in his final throws, was still trying to encourage world leaders to prop up some notion of the “free market” (ie capitalism) alebit using trillions of dollars in tax-payers money to do so.

    It’s a completely absurd idea. In other words he wanted and still wants to prop up a system which has proven itself to be a complete failure.

    While some people speculated in the past that there would be a crash, I don’t that anyone predicted the enormity of the damage and it’s catastrophic effects around the world.

    Of course, we always get a lot of doom-sayers coming out the woodwork, and the media loves to play up a “bad news” story, it gets more ratings than a “good news” story, so although I think things are bad, and potentially going to deteriorate further, I also believe that Governments around the world are acting quickly to prevent further collapse, and the effects of these measures are perhaps not being taken into consideration by the media.

    In other words, things may not get as bad as the doomsayers are making out.

  2. John, about 20+ years ago, I read many, possibly even most, of Galbraith’s books. I haven’t refreshed my memory over the past decade or so, I’ll have to fish them out.

    At the time, Galbraith seemed top be about the most insightful mind on earth. But in hindsight I think his attraction was his engaging style of writing, sprinkled with plenty of humour. Economists aren’t traditionally known for humour, but the strength of Galbraith was the human and social commentary rather than the economics.

    It should be remembered that the debacle that was Victoria in the early 90s was full of government economic advisors that were strong proponents of Galbraith. Many could recite him word for word.

    His period as a war time price controller probably set his own perception about the benefits of strong regulation.

  3. Those who know me will know that I’m no free market capitalist. But I’ve been wondering to myself, isn’t what is occurring more a sign of the success of capitalism rather than its failure? Looking at it from a macro perspective, this is the crash we had to have. We will recover from this, and learn some lessons, at least for a while. People will certainly continue to go about their business. They may have a little less to spend, but has anyone ever visited Africa? From a micro point of view, yes I get that some people are suffering, but is their suffering comparable to the numbers and the level of suffering in those economies which don’t offer the freedoms of ours? Don’t get me wrong, I’d like to take to some greedy speculators with a baseball bat, and I particularly resonate with the comment above regarding Capitalism’s lack of social conscience, but it’s kinda like democracy, it sucks but not as much as the alternatives.

  4. sreb, as you know some of us “doomsayers” have had a pretty tough time from other posters over the last 18 months or so – it is just that people always have trouble with the truth – even when its proved to them…

    …trust me, I used to be a training facilitator!

    One of the biggest issues facing society is that we don’t live in a society anymore – everyone is an individual…with individual rights…freedoms, privacy, bad manners, selfishness, meanness…

    …making money at any(one else’s cost) is the current mantra…until governments realise that certain things belong to “the people” and certain things belong to “free enterprise”…and confusing democracy with capitalism…the current situation will continue…ie boom and bust…

    …as a young man in the ’80’s I was told that the cycle of boom and bust was over…the RBA…would control that…mmmm

    …government needs to govern for the people not for banks and business (and their own trough)…

    …if you were a multi millionaire why would you work for a few hundred thousand and perks as a politician/minister?

    Only one answer – to make more money…

    …maybe I should re-read King Arthur and the Knights of the Round Table again, or, perhaps Robin Hood…

    …nothing changes…

  5. TB,

    regarding your reading material, I just say “ni”.

  6. Tom

    I find many of Galbraith’s observations very insightful and funny too. Another man is George Soros, especially his ability to predict major economic and financial upheaval simply because he understand how destructive and inefficient ‘free markets can be when left to their own devices. He’s made billions out of it. You should get a copy of Soros’ latest

    He Foresaw the End of an Era
    By John Cassidy
    The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means by George Soros

  7. On the upside, this crisis is encouraging us to get back to basics.

    Keynes was right when he said “(While) the actual private object of most skilled investors today…is a battle of wits to anticipate the basis of conventional valuation a few months hence… the social object of investment should be to defeat the dark forces of time and ignorance which envelop our future.

    …an inevitable and a desirable nemesis on so much over expansion, as they call it; a nemesis of man’s speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.”

    Mike Steketee, National affairs editor wrote yesterday:

    Proposals for financial reform we can believe in
    TWO weeks ago, Reserve Bank governor Glenn Stevens hinted at how fundamental the changes could be that flow from the financial meltdown.
    “Perhaps the finance sector globally will return to fulfilling something more like its historical role of being the handmaiden of industry, with a bit less in the way of exotic innovation of its own,” he said.
    “In such a world, a renewed focus on the processes in the real economy (that) generate growth in productivity could also be apt.”
    This is a central banker’s way of saying it’s time to get back to basics. One of the clearest analyses of the collapse of the financial house of cards built on the foundations of the banking system comes from David McIlroy, a visiting lecturer in banking law at the University of London.
    Traditionally, he points out, banks lent money to companies and people, and collected the repayments. In other words, the bank had a direct financial interest in the ability of the customer to make the repayments.
    Breaking this link between borrower and lender is the source of the problem, he argues. It started in the 1970s when mortgage lenders backed by the US government — among them Fannie Mae and Freddie Mac — hit on the idea of selling their loans to commercial financial institutions. Instead of having to wait for the loans to be repaid, they received the cash up-front. Private banks soon got into the act, bundling together mortgage loans and selling them to other banks. This meant they could expand their business far faster, using the money they received from other banks to push out more loans. The merry-go-round continued until US house prices fell, the repayment of mortgages was thrown into doubt and the banks stopped lending to one another.”

  8. Ross Gittins is hard to beat when it comes to reducing a complex subject into easy to understand language. The name of the game means emphasise quality regulations in order to save ourselves from ourselves:

    In the recession of the early 1990s it was called “balance sheet repair”. This time it’s being called “deleveraging”. But whatever mystifying name it’s called by, it’s simply what you do when you realise you’ve borrowed far more than you should have: cut back your spending and try to reduce your debts.

    Trouble is, when a lot of businesses – or a lot of families – do this at the same time, it hurts like hell. When too many people cut back their spending, they make things tougher for everyone.

    The cut-backs feed on themselves: my reduced spending reduces your income, which prompts you to reduce your spending, which reduces my income. I respond by reducing my spending and round we go again. In the process, people get laid off, businesses collapse and the economy gets smaller – which is the definition of recession.”

  9. It would have helped if I provided a link to the Ross Gittins article

    A world of pain when debt gets the better of us

  10. John, prompted by you, I’ve just been delving through my storage of my old books – fishing out one or 2 by JKG.

    I’ve decided to have another read of “A View from the Stands”, published in 1987. It is a compilation of his essays.

    Reading the more contemporary introductions to each essay, his sharp turn of phrase is the first thing I noticed. Damning with faint praise is his speciality.

    Of Reagan “… one must say a word here for the Reagan administration. It has kept writing on even the earliest and most urgent of these concerns from becoming obsolete…”

    On William F Buckley (a friend despite their obvious differences) – “I can take the opposite position without any tedious celebration and know that I won’t be wrong”.

    I think this book is a real illustration of the breadth of his thinking and contribution. Far beyond an economic analyst.

  11. Agreed Tom, I’m wondering whether you’ve come across ‘The Economics of Innocent Fraud: The Truth of Our Time. Written in 2004. It’s only a small book 77 pages packed with his brilliant insights.

    The main trust Galbraith reveals the unacknowledged grip of the private sector on public life and considers our increasing tendency to accept blindly legal, legitimate, ‘innocent’ fraud.

  12. #3. James of North Melbourne | November 7, 2008 at 10:09 am

    Capitalism’s lack of social conscience, but it’s kinda like democracy, it sucks but not as much as the alternatives.

    That’s where I think you get it wrong James. Capitalism cannot in any way be compared to forms of government. You are right that democracy at times really sucks and even though there are different kinds attempting to fix its inherent flaws, the alternatives are much worse.

    Capitalism isn’t like that and there are alternatives within in its framework, but most of all capitalism can be easily (in theory) fixed because it’s a balancing act. Trouble is capitalism’s inherent flaws don’t allow it to balance responsibility with greed, that has to be governments’ job, but the trouble with that is that most governments are capitalists or beholding to capitalists.

    So why should we continue boom and bust cycles when over the next 20 years we will have several more busts leading to yet another massive one that will make this current crisis look like a game of Monopoly. We know this is going to happen right now yet as night follows day we will let it happen.

    Already the capitalists are moving to decree there is nothing wrong with capitalism except over regulation, as little as the current regulation is, and they are gaining ground and being heard where it counts. Like you they are decreeing capitalism didn’t fail but greedy individuals within it and governments did, and what is needed is more unfettered capitalism without government intervention.

    So one of capitalism’s inherent unmovable flaws is greed is built in as a premise, and as long as that is the case capitalism will always fail.

    Capitalism’s other inherent flaw that cannot be reconciled is it’s built on continuous growth that’s mostly unsustainable. It can only function as long as populations grow, the living standards of populations continue to increase and the earth keeps on spewing up raw materials in ever increasing amounts to feed the growing expectations (expectations set by the capitalist themselves). There is a breaking point in this somewhere, and this is also well known and oft discussed but are the capitalists doing anything to plan for it? Of course not, because that goes against another capitalist decree, capitalism is limitless.

    So in summary capitalism has some major built in flaws (with greed is good at the top) and these are well known having being comprehensively discussed for many decades now (as John Mac keeps profusely posting on), but as well understood as these flaws are capitalism cannot address them otherwise it would no longer be capitalism for these are fundamental to it. So not only does capitalism keep fighting to keep the flaws that are fundamental to it, it always attempts to have restrictions on them removed so they can be expanded without restraint.

    So putting on my doomsday hat, if allowed to continue (which it appears is going to happen) there inevitably must come a time when we’ll all be rooned.

  13. Adrian

    Brilliant summary

    “So in summary capitalism has some major built in flaws (with greed is good at the top) and these are well known having being comprehensively discussed for many decades now (as John Mac keeps profusely posting on), but as well understood as these flaws are capitalism cannot address them otherwise it would no longer be capitalism for these are fundamental to it. So not only does capitalism keep fighting to keep the flaws that are fundamental to it, it always attempts to have restrictions on them removed so they can be expanded without restraint.”

  14. Adrian (14) Bravo, but oh so depressing for humanity and the environment.

    We are undoubtably as a species the most intelligent animal on the planet, and paradoxically the most stupid as well.

    How naive I was to think humanity had some hope beyond the cold war. All I see in our future is economic wars, mass shortages, for poor countries first, but eventually for us too and catastrophic climate change.

    Oh well. Time for a cup of tea.

  15. …and true to form as some governments in Europe now want to shackle capitalism and make it completely responsible for its actions and to society, even going as far as making some of its recent acts criminal offences, other governments, and every one conservative like Germany’s Angela Merkel, want to draw back on and dilute legislation punishing financial institutions for engaging in greed that eventually hurts people.

    Instead of increasing regulation the cries to free the regulations are growing in strength and this is getting sympathetic ears from many in governments around the world.

  16. …and just as I say there is a move to either water down regulation of the causes of this crisis and to even further deregulate or remove all regulation from them, up pops Wayne Swan last night and confirms my fears.

    “What is needed is not more regulation but better regulation”.

    So give it a year or two and the world will be right back on the same runaway train going even faster and having no emergency brakes heading for a rotten and undermined trestle bridge over the deepest precipice in the world. In the meantime those who manage the train, govern the flawed rail network and who built the shonky bridge will get very rich and know full well when the train plummets into the precipice with all the ordinary commuters of life onboard those ordinary commuters will bail them out again and those running the rail networks will give them even more latitude to do what the want until the next even worse crash.

    The proof also lies in the new NZ government that won office by moving to the centre but made an alliance with the hard right. Already there is talk of Key’s breaking his promise of remaining in the centre in moving right and giving large breaks to the wealthy.

    So what lessons have been learnt from this financial crisis, none.

  17. Adrian, are you surprised???

    A train wreck is needed to rebuild.

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